Cash-strapped governments are raising money for projects with long-term debt
A recent $150 million refurbishment of two decades-old geothermal power plants on the Philippine island of Luzon may sound like just another project aimed at overcoming the country's severe electricity shortages. But, for Asia's insurance companies, there is more to it.
Bonds issued to pay for the upgrades and future operation costs, worth 10.7 billion pesos ($213 million), were backed by the Asian Development Bank -- the first such project bonds issued in Southeast Asia, excluding Malaysia, since the 1997 Asian financial crisis.
The bonds for the Tiwi-MakBan geothermal power stations were initially purchased by the Bank of the Philippine Islands. The bank is in discussions to sell off some of the debt to insurance companies, mainly local units of multinational insurers with experience of investing in project bonds in Western markets.
Investors see infrastructure projects as risky, especially green-field assets that take a long time to bear fruit. But credit enhancement -- backing by a multilateral lender, for example -- helps reduce the risk of default, encouraging institutional investors such as insurance companies and pension funds to put money into them.